If you have been tracking the market over the past few years, you’ve likely encountered a flood of reports declaring AI as a “must-have” investment, driving significant gains for market leaders like NVIDIA. Concurrently, concerns about an AI bubble—drawing parallels to the dot-com bubble of the early 2000s—have emerged, suggesting the sector might be losing momentum. We contend that the reality lies between these extremes. This article introduces the AI industry, highlighting what it is, how companies are leveraging it, and which sectors might benefit indirectly. We’ll also address potential pitfalls. Look out for more in-depth coverage on these topics in our future newsletters.
What is it?
Very basically, Artificial Intelligence (AI) represents an advancement in technology, mimicking human intelligence to enhance decision-making and efficiency. By analyzing vast amounts of data and recognizing patterns, AI systems can provide insightful recommendations, streamline operations, and predict trends with remarkable accuracy.
How are Companies Leveraging AI?
Companies are increasingly turning to AI to fuel growth by enhancing efficiency, optimizing decision-making, and discovering new revenue opportunities. A prime example is Amazon, which employs AI to revolutionize its operations and customer interactions. Through advanced algorithms, Amazon personalizes product recommendations, streamlines supply chain logistics, improves inventory management, automates warehouse operations with robotics, and AI also powers Alexa, its virtual assistant This strategic integration of AI not only boosts operational efficiency but also drives substantial revenue growth by creating a more personalized and efficient shopping experience.
Indirect Beneficiaries
As the AI industry continues to expand, its substantial computational needs are driving a notable increase in energy demand, prompting renewed interest in alternative energy sources. AI’s sophisticated algorithms and data processing require significant power, which may put pressure on existing energy infrastructure. In this context, nuclear power is being revisited as a potential solution due to its high-output and stable energy capabilities. For example, recent pilot projects have demonstrated how small modular reactors could supply reliable power to data centers, helping to meet their growing energy needs while maintaining low carbon emissions.
While nuclear energy presents a low-carbon option that could meet the escalating demands of AI, its development may also influence broader industries such as manufacturing and technology, which could benefit from more stable and cost-effective energy solutions. This evolving dynamic underscores the shifting landscape of energy requirements driven by technological advancements.
Pitfalls
Investing in AI offers exciting potential but comes with its share of challenges. For example, the rapid evolution of technology means that companies like IBM, which invested heavily in early AI systems, now face the risk of their earlier innovations becoming obsolete as new breakthroughs emerge. The sector’s speculative nature was evident in the case of companies such as Theranos, which, despite initial hype around its AI-driven health diagnostics, ultimately failed to deliver on its promises. Additionally, evolving regulations—such as the European Union’s proposed AI Act—could impose new compliance costs and restrictions on AI development. Lastly, high R&D expenses are illustrated by firms like OpenAI, which has invested billions in its research without immediate financial returns. As you explore AI investment opportunities, being aware of these specific risks will help you make more informed decisions.
The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. The reported numbers enclosed are derived from sources believed to be reliable. However, we cannot guarantee their accuracy. Past performance does not guarantee future results. We recommend that you compare our statement with the statement that you receive from your custodian. A list of our Proxy voting procedures is available upon request. A current copy of our ADV Part II & Privacy Policy is available upon request or at www.baldwinmgt.com/disclosures.
Joe Much, CFA, Associate Managing Director of RKM
Joe hails from Wilmington, Delaware, where he spent most of his life. He earned his undergraduate degree in finance from Temple University before furthering his education with a graduate degree in investment management, also from Temple University. Holding the CFA charter, which he achieved in 2022, Joe aligns with the caliber of professionals at Baldwin.
Before joining Baldwin, Joe served as the Director of Investments for a financial advisory firm at Northwestern Mutual in Albuquerque, New Mexico. His passion for all facets of the market drives him to dedicate substantial time researching, analyzing, and forecasting investment opportunities. Moreover, Joe finds fulfillment in working with clients, guiding them towards financial freedom through meticulous long-term investment strategies.
Outside of his professional pursuits, Joe indulges in golfing, outdoor activities, and competes in strongman weightlifting competitions. His favorite financial quote is, “The market can remain irrational longer than you can remain solvent.”